Pooling the UK Local Government Pension Scheme

Pooling the UK Local Government Pension Scheme

February 2016
Paul Traynor   |   International Head of Pensions and Insurance Segments, BNY Mellon
Lawrence Langenhan   |   Segment Head, Asset Servicing - Asset Owners, BNY Mellon
Dean Handley   |   Business Executive, Asset Servicing - UK Pensions, BNY Mellon

Foreword

In 2014, the UK Government launched a consultation process on its far reaching proposals to reform the Local Government Pension Scheme (LGPS), one of the largest defined benefit schemes in the world with over four and a half million members. It is undeniable that pooling the 89 funds within the LGPS into six larger pools will boost authorities’ purchasing power. Synergies and economies of scale will help local authorities access certain asset classes in a more cost-effective way and will boost LGPS investment in infrastructure.

But we are entering new territory and the scale of what is being proposed should not be underestimated. The Government has set a very fast timetable for the implementation of the reforms. This means thorough examination of the key challenges to success is required now so bigger problems down the line can be avoided.

This White Paper seeks to bring clarity to issues currently shrouded in uncertainty. This lack of clarity is not surprising – the LGPS is being asked to do something it has never done before. We have therefore highlighted in this White Paper areas we think are currently misunderstood by some stakeholders, factors that pose potential problems going forward and areas where Government clarification would make the process easier. READ MORE

Recommendations

This White Paper makes a number of recommendations to both LGPSs establishing pools and to the Government on how the pooling process can best be achieved.

  • LGPS pools should be established within an ACS, run by an Operator and set up on a co-ownership basis, 
  • HM Revenue & Customs should take steps to improve the tax efficiency of UK tax-transparent funds to enable LGPS pool ACSs to invest in infrastructure and other asset classes more efficiently,
  • Competition between pools should be retained so schemes can switch pool if performance is persistently poor.

READ MORE RECOMMENDATIONS

Chapter 1: The Machinery of the Reforms

The Government’s reforms to the LGPS will enable the 89 local authority funds within it to collaborate in the procurement of investment services, creating economies of scale that will drive down costs, increase efficiency, give access to hitherto unreachable investments and facilitate specialisation by individuals operating within the sector. READ MORE

Chapter 2: Costs and Charges

‘Reduced costs and excellent value for money’ are part of the criteria the Government has set against which to judge authorities’ pooling proposals. The Government is correct to identify excessive management costs as a key issue for the LGPS. The Government’s pooling proposals will increase scale, upskill purchasing and oversight functions and give access to a broader range of investments at lower cost. However there are concerns that the Government is approaching this efficiency drive from a perspective that focuses too much on reducing cost and not enough on delivering excellent value for money. READ MORE

Chapter 3: Investing in Infrastructure

Infrastructure investment is critical to the nation’s economy, fuelling jobs and growth. Levels of investment by pension funds in general and the LGPS in particular are low by international norms. But the LGPS cannot be seen as an easy way to plug the nation’s infrastructure funding gap. READ MORE

Chapter 4: The Political Backdrop of the Reforms

Pooling the LGPS into six pooled entities was always going to be a process with a political dimension. The bringing together of the funds of 89 democratically elected bodies into super funds will inevitably bring challenges. We support the voluntarist approach, backed up with compulsion if necessary, that the Government has adopted, and the early signs are positive, with a large number of schemes are already engaging in finding bodies with which to partner. However, this process brings all parties into new territory – and there are many hurdles that will have to be overcome. READ MORE

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